The great plunge in iron ore prices is starting to inflict a growing trail of damage across the sector.
It’s not just on revenues and earnings on existing miners, the 40% fall this year has seen, in the last fortnight, a small UK based miner called London Mining collapse, and on Friday night, the US group, Cliffs Natural Resources took an axe to its balance sheet and hacked $US6 billion off its asset base.
As well an iron ore mining company controlled by failed Brazilian billionaire, Mr Eike Batista filed for bankruptcy late last week. It was the third time in a year that a company controlled by the former billionaire’s EBX industrial group has sought protection from creditors.
Sudeste Mineracao filed for bankruptcy protection. It holds nearly all the significant assets of Batista’s MMX Mineracao e Metalicos, part of a mining, oil, energy, shipbuilding and port group that suffered one of the most spectacular collapses in emerging-market history in 2013 that at its height, was valued at $US50 billion. Now it is all but worthless.
London Mining, which employs 1,400 people at its iron ore mine in Sierra Leone went bust late last week after hovering on the brink of collapse for weeks.
The Ebola outbreak added to its pain – the company is slap bang in the middle of the terrible outbreak and it has added to the burden from the 40% plus plunge in iron ore prices.
So administrators were appointed on Thursday night, our time. The company has been mining since 2005 and was responsible for an estimated 10% of Sierra Leone’s GDP, so it is forced to close, the impact will be devastating for a country whose finances have been destroyed by the ebola outbreak.
London Mining shares traded above £4 in 2011 and when they were suspended at 0.75p valuing the company at just £1 million.
Cliffs Natural Resources $US6 billion write-down was mostly related to the poorly-timed purchase of a Canadian iron ore mine which it intended to supply the then-booming Chinese steel market.
Cliffs expanded in Canada in 2011 when it bought Consolidated Thompson Iron Mines Ltd. and the Bloom Lake mining operation in Quebec province for $US4.9 billion.
At the time, Cliffs officials said they hoped to diversify from their traditional business of mining iron ore in Michigan and Minnesota and selling it to US Midwestern steelmakers. Specifically, they wanted to ship ore from Canada to China, which produces around half of the world’s steel and imports around two-thirds of all the iron ore traded on global markets.
But that was a pipe dream – the mines are too far away from China, the shipping costs were high and the mines were not competitive.
In the first eight months of 2014, iron ore exports to China from Canada fell 19% at 7.4 million tonnes (and most of that would have been accounted for by Ships from Rio Tinto’s Canadian mine). In contrast, exports from Australia to China soared 34% to 354 million tonnes.
As a result, with world iron ore prices around $US80 to $US90 a tonne in the second quarter of this year, and Cliffs’s costs at its Eastern Canadian operations at $US87.50 a tonne, iots no wonder the expensive mines lost heavily. Cliffs, Canadian mines lost $US88.2 million in the first six months of 2014, almost triple the $30.3 million loss in the same period in 2013.
Cliffs is seeking partners for its Canadian operations, and its Australian iron ore mines, which are still profitable but have trouble competing with BHP, Rio and Fortescue.
Bloomberg has previous reported that Mineral Resources Ltd. and Mount Gibson Iron have expressed interest in the Australian mines owned by Cliffs.
It is also seeking buyers for a chromite project in Canada, and its US coal operations.
Cliffs’s strategy now is to return to its old business of being the biggest US iron ore miner centred on its five mines in Minnesota and Michigan and supply ore to automotive-focused steel mills in the Midwest, such as ArcelorMittal. With the auto industry doing well, those mines have been profitable.
Cliffs’s stock fell 8% to $US8.74 on Friday. In the second quarter, the company reported a net loss of $US1.9 million thanks to the losses in Canada and the US coal operations. A year ago it made a profit of $US133 million. Last week, S&P lowered the miner’s credit rating to BB- from BBB- with a negative outlook, citing falling iron ore prices. That’s a ‘junk’ rating.
At the end of September Cliffs had about $US250 million in cash on hand. Cliffs reports third-quarter earnings after the close of trading on October 27.
